Select Committee on Treasury Written Evidence


Memorandum submitted by Center of Concern

EXECUTIVE SUMMARY

  In April 2004 the IMF launched the Trade Integration Mechanism (TIM), a policy oriented to enhance the predictability of access to financing by member countries experiencing difficulties as a result of certain trade events. While the establishment of the TIM implies a welcome recognition of the financial problems triggered by trade liberalisation in developing countries, it represents an ineffective and far from sufficient response to such problems.

  Moreover, the TIM arguably distorts the IMF's function of providing short-term balance of payments support to all its members, without discriminating regarding the sources of the financial shortfall. The TIM, however, implies an attempt to influence the trade policy decisions of its members by providing them a sense of comfort and setting up a counterargument that makes it harder for them to resist multilateral liberalisation measures that will bring large dislocations to their economies.

  The TIM does not represent access to additional resources; does not ensure access to concessional resources; does not ensure fast and easy access to financing, is of limited scope and its time coverage is not symmetrical to the time coverage of the trade rules generating the losses.

INTRODUCTION

  1.  In April 2004 the IMF launched the Trade Integration Mechanism (TIM). In the Fund's own words, the TIM is not a new facility, but a policy oriented to enhance the predictability of access to financing by member countries experiencing difficulties as a result of certain trade events.

  2.  A given country could apply to financing under this policy when their balance of payments problems arise from trade liberalisation measures introduced:

    (a)  by other countries;

    (b)  resulting in more open market access for goods and services; and

    (c)  under a WTO agreement or on a nondiscriminatory basis (IMF 2004a: 15/16).

  3.  Three examples provided by the IMF are: the country is suffering erosion of preferences as a result of other countries opening their markets; a net-food importing country is experiencing surge in the prices of food imports as a result of subsidy removals by another country; a country experiencing losses of textiles markets as a result of elimination of bilateral quotas.

  4.  Given that the TIM is a policy designed to shape access to existing facilities without creating a new one, any country wishing to obtain financing under this policy will need to do so in the context of an existing facility or arrangement with the Fund, eg, the country is borrowing under an upper-tranche Stand-by, Extended Fund Facility or a Poverty Reduction and Growth Facility arrangement. This means that all conditions the borrower needs to satisfy in order to borrow from the facility in question (at the very least, the basic tenets of a Fund adjustment program), will still need to be met. Also, with some caveats, it is the levels of access and financing terms of such facilities that will apply.

  5.  While the establishment of the TIM implies a welcome recognition of the financial problems triggered by trade liberalisation in developing countries, it represents an ineffective and far from sufficient response to such problems. Moreover, there is a concern that the TIM represents a distortion of the IMF's function of providing short-term balance of payments support to all its members. In fact, if the Fund were to be true to its mission, it is hard to justify a policy that guarantees to members undergoing balance of payments problems stemming from a particular event financial help that the Fund, actually, should not be able to deny to any member undergoing a balance of payments problem.

  6.  Such a policy, however, can be understood as one more chapter in the series of Fund's undue interferences in the trade policy decisions of its members. As expressed by Fund staff, one of the key factors delaying the liberalisation agenda at Doha and Cancun is that several countries, though "accepting the overall value of liberalisation", question its impact for their own economy (Press Conference). TIM seeks to influence the trade negotiating stance of these countries by providing them a sense of comfort and providing a counterargument that makes it harder for them to resist multilateral liberalisation measures that will bring large dislocations to their economies.

  7.  In particular, the TIM suffers of the following limitations: The TIM does not represent access to any additional resources.

  8.  The IMF does explicitly clarify that the TIM "would not be a special facility that would provide resources under special terms. Rather, it is a policy designed to increase the predictability of resource availabiity under existing facilities." (IMF 2004a: para 24).

  9.  This means that the level access to resources by affected countries will continue to be governed by the current rules that rule upper credit tranches, Extended Fund Facility or PRGF arrangements. (IMF 2004a: para 33).

TIM does not ensure access to concessional resources

  10.  The TIM does not ensure access to concessional resources in order to compensate countries for trade losses. Under current Fund rules, the only facility that provides concessional financing under what countries could invoke is a case foreseen by the TIM is the PRGF. [31]

  11.  The lack of available concessional resources raises a number of issues. To the extent that compensatory financing comes in the form of non-concessional resources, it means that the affected countries are being pushed to address their trade-related BOP problems by increasing their debt, not a healthy choice for any economy, let alone for those countries that are struggling to service an already high debt overhang. [32]In turn, the Debt Sustainability Framework focuses on setting limits on countries' ongoing ability to borrow under non-concessional terms. For countries with debt at unsustainable or nearby levels, this means that the actual impact of third party trade measures on their BOP might be totally irrelevant if there are no available concessional funds for them to access. Finally, absent debt considerations, non-concessional resources might just be too expensive for countries to access them, this being especially so in the case of the countries that need them most. The experience of the Compensatory Financing Facility (CFF) is worth recalling in this regard. The CFF was established in the 1960s to help countries dealing with certain externally caused commodity shocks. However, especially beginning in the 1980s, it came to be of little or no use to the low- income countries, because of the non-concessional character of the CFF loans.

TIM does not ensure fast and easy access to financing

  12.  Given that this mechanism is about compensating countries for trade shocks that are motivated by trade measures beyond their control, it seems just reasonable that the access to financing should be ensured in fast and simple terms. However, being the TIM not a new facility with different terms but rather a policy that applies in accessing an existing facility, all conditions for access to the facility in question apply.

  13.  In the context of searching for effective mechanisms to compensate for trade losses, the question of how easy to meet are the conditions to access the financing is a crucial one for at least two reasons. Firstly, several analysts have criticised the IMF policy-based prescriptions, the IMF's jurisdiction to make them and their actual performance. In addition to the usual problems with these prescriptions, a factor at stake when countries seek compensation for losses that stem from third country trade liberalisation measures is that the requesting country is, by definition, one whose own policies are not the ones causing the BOP problem. Therefore, in principle, there should not be need for an adjustment program together with the financing. However, the fact that any assistance will be provided under existing facilities ensures that any financing will be accompanied by the controversial type of conditionalities associated to adjustment. Second, the need to meet the tough conditions of an adjustment program usually mean time delays that, while probably acceptable in other situations, become defeating in the context of compensation that is supposed to operate anti-cyclically in order to smooth the effects of the shortfall on the economy.

  14.  In fact, in drawing the TIM, IMF staff explicitly considered and dismissed the possibility of having an arrangement outside existing facilities. This was done on the argument that "financial support of this nature still needs to be associated with an appropriate macroeconomic environment, which may entail adjustment." (IMF 2004 a: para 28). In support of this conclusion staff quoted the 2000 review of the CFF where it was decided that disbursements need to happen in the context of adjustment, unless in cases where the balance of payments was otherwise found to be satisfactory, adding that this test "is not often met" (IMF 2004 a: idem).

  15.  Another factor to keep in mind in assessing the difficulties and speed in accessing financing under the TIM is that the estimation of the adverse shocks that the third-party liberalising measure has on the country's BOP will be done by the Fund itself. The Fund's experience in projecting growth, debt sustainability and financial crises provide enough reasons to be very cautious about the Fund's ability to get it right in terms of projecting trade losses. The staff paper on the TIM provides important indications that affected countries tend to have a heavy burden of proof in demonstrating that a particular BOP problem is due to certain exogenous trade events rather than (1) to its own "mismanagement" of the economy or (2) not canceled out (or entirely offset) by the positive effects of the liberalising measure at stake. [33]

TIM IS OF LIMITED SCOPE

  16.  As explained above, a member country could apply to financing under this policy when their balance of payments problems arise from trade liberalisation measures introduced (a) by other countries, (b) resulting in more open market access for goods and services and (c) under a WTO agreement or on a nondiscriminatory basis (IMF 2004a: 15/16).

  17.  The policy does not cover impact of a country's own trade liberalisation measures. In justifying this, Funds staff argues that "in these cases, the balance of payments impact, and indeed the occurrence of the negative event itself, cannot be considered separately from the macroeconomic framework and the authorities' policy response." This is not an uncontroversial assertion. Premature liberalisation, of the kind many countries have engaged in as a result of the advice of the Bretton Woods Institutions themselves, or as a result of legal frameworks where negotiations are highly unequal or do not offer enough flexibility for countries to appropriately sequence the efforts and explore levels of openness on a trial basis, exposes countries to unforeseen vulnerabilities that are beyond their control. Moreover, if countries are suffering impacts of exogenous trade events at the same as they open their borders, it might become very difficult for the Fund to disaggregate the impacts of the country's own policies from those of third-party liberalisers.

  18.  In order to qualify, the benefits of the measure have to accrue to the whole WTO membership. (It does not need to be bound in the WTO, though, as long as the benefits accrue to the whole membership through operation of the MFN clause). This requirement brings important connotations. While liberalisation of South-South trade can have positive effects for developing countries, some experts have explained that such liberalisation, to be useful to those countries, needs to happen in the context of tariff negotiations in the regional arrangements among the developing countries or tariff negotiations in the framework of the GSTP (Global System of Trade Preferences). Reduction of South-South tariffs in the context of the WTO would make any benefits immediately available to all WTO members, exposing the liberalising country to competition with industrial countries with larger supply capacity and export infrastructure. However, this is exactly the kind of liberalisation for which the TIM provides incentives, as it is the only one whose impacts would qualify under the TIM. Neither would the BOP impacts of measures undertaken in the context of regional or bilateral agreements qualify. Again, almost insurmountable methodological problems are posed by the fact that most countries are engaged in negotiations at different levels, what makes the effects of different and sometimes simultaneous measures hard to disaggregate. Countries trying to meet the requirements for access to finance will certainly find this hard to proof.

The time coverage of TIM is not symmetrical to the time coverage of the trade rules generating the losses

  19.  It is important to note that the trade liberalisation rules that might be agreed in the WTO under the comfort provided by the TIM, will be irreversible, even if the dislocations prove to be more lasting than expected, or chronic, as the terrible experience of too many liberalising countries has shown.

  20.  The TIM has been put in place for an initial period of three years after which it will be evaluated. (IMF 2004a: para 44) Although after this period the Board could decide to continue it, there is not guarantee that this will be the case. In fact, the prospects of an extension in current terms and without worsening the modest terms of access (as it has been the case with other facilities over the past several years) are rather limited. As stated by the Fund, given that it is designed to "ease adjustment to specific trade events, which will be implemented over a limited time horizon" the policy is envisioned as temporary in nature. This statement reflects a large measure of optimism regarding the effects of the events and the time needed for adjustments. Optimism is not warranted, given the problems low income countries experience in inserting themselves into new income-generating activities where barriers to late entrants are high and competition large and skewed towards incumbents. At the least, there should be some guarantee that TIM will not be discontinued until appropriate, independent verification that countries under need to implement radical changes in their productive structures as a result of impacts of trade policies have been able to do so.

Sources

IMF (2004a) Fund Support for Trade-Related Balance of Payments Adjustments (Prepared by the Policy Development and Review Department), March 2004:

http://www.imf.org/external/np/pdr/tim/2004/eng/022704.htm

IMF (2004b). The Fund's Support of Low Income Member Countries: Considerations of Instruments and Financing (Prepared by the Finance and Policy Development and Review Departments), February 2004

IMF (2004c). IMF Concludes Review of the Compensatory Financing Facility. Public Information Notice No 04/35, April 7, 2004

IMF (2004d). IMF Concludes Discussion on the Fund's Support of Low-Income Member Countries: Considerations on Instruments and Financing. Public Information Notice No 04/40. 15 April 2004.

Press release: IMF Executive Board Approves Trade Integration Mechanism (available at

http://www.imf.org/external/np/sec/pr/2004/pr0473.htm).

Press Teleconference Transcript (with Hans Peter Lankes, Trade Policy Division Chief, Policy Development and Review Department) on the "Trade Integration Mechanism"

http://www.imf.org/external/np/tr/2004/tr040413.htm





—  Based on "model simulation . . . the impact of preference erosion is unlikely to be large for most countries" (IMF 2004 a: para 14).

  —  "Several food importing developing countries are net exporters of some nonfood agricultural products and price effects may partly cancel out in their impact on the balance of payments." Also, "domestic production in some NFIDCs (Net Food Importing Developing Countries) is likely to expand in response to higher prices, thus improving the domestic food balance." (IMF 2004 a: para 15).

  —  "In some cases, different trade events might have directly offsetting impacts on the balance of payments" (IMF 2004 a: fn 14) Along the same lines, the IMF refers to simulations with the Global Trade Analysis project model which "demonstrate that any negative impact tends to be more than offset by other factors."

  —  "BOP implications would also depend on the foreign exchange regime in place in the country in question"(IMF 2004 a: para 20).



31   The PRGF lends at maturities of 5Ö to 10 years and an interest rate of 0.5 a year. Roughly described, the PRGF Trust Fund is made up of loan funds provided by bilateral creditors where some bilateral donors and the IMF provide grants in order to subsidise the interest rate. The grant element of this concessional funding is not very high, either, especially in the light of currently low market interest rates. (For more on this see IMF 2004b: 13/15). Back

32   In addressing a question, an IMF official acknowledged that a country should not trespass debt sustainability thresholds in order to make up for trade losses. If the solutions to these countries is not more debt, and there are no grants available to make up for their trade losses, then it should follow that the problem belongs to the trade system and is there where it needs to be addressed through significant changes to the rules. Back

33   Some examples of this: Back


 
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